Caveat: recent letter ruling raises issue of whether sec. 304 applies in domestic spin-off transaction.

• Author: Lombardo, Mario E.
• Position: Brief Article

In a recently issued favorable Sec. 355 letter ruling, the IRS declined to rule on whether Sec. 351, 368(a)(1)(D) or 304, or Regs. Sec. 1.1502-80(b), applied to an asset transfer that preceded a spin-off transaction. The transaction involved a transfer of assets (including stock of a subsidiary) by a distributing corporation (Distributing) to a controlled corporation (Controlled) for the latter's stock and cash, followed by a distribution of the Controlled stock to Distributing's public shareholders. The cash received by Distributing was used to satisfy debt.

The ruling, which will be released to the public shortly, is noteworthy for several reasons. First, by declining to rule on the asset transfer, the Service appears to be considering whether it will apply Sec. 304 to a transaction that qualifies as a divisive Sec. 368(a)(1)(D) reorganization. Although it is clear under Sec. 304(b)(3)(A) that Sec. 304 supersedes Sec. 351 when both sections apply, it generally has been assumed to be equally...